SMALL SCALE INDUSTRIES
WHY FEASIBILITY STUDIES ?
1. Feasibility studies help entrepreneurs to make investment decision.
2. Needed by agencies and organizations to assess availability of projects for giving assistance.
3. Investment decisions arrived through feasibility studies reduce the mortality of infant small industry.
4. Broad industrial programme for the area are converted into viable projects through feasibility studies.
WHO MAKES FEASIBILITY STUDIES ?
(There may be coordination between Development Organisations/ Consultants with entrepreneurs in the preparation
TYPES OF FEASIBILITY STUDIES
1. Tailor-made studies to suit a particular entrepreneur
2. Study made for a particular area for attracting prospective entrepreneurs.
3. Feasibility studies for the area have to take care of the needs and capacities of the prospective entrepreneurs for investment and management.
ELEMENTS OF FEASIBILITY STUDIES
1. Demand analysis
2. Technical analysis
3. Financial analysis
4. Special Considerations
Correct assessment of the demand for the product is the first step in the preparation of a feasibility study.
1. Output characteristics; and
2. Input characteristics
Output Characteristics :
(1) Perishable ) Products have a small market
bulky Heavy ) (area-wise)
Low Cost )
Compact Durable ) Products have wide markets
High Cost )
a. Industrial products and components
b. Products that are inputs in specific sectors
c. Consumer goods
1. Resource-based products
a. Agricultural resources
b. Forest resources
c. Marine resources
d. Mineral resources
2. Based on other industrial products or by-products
3. Skill-based industries
4. Based on other infrastructures such as abundance of electricity.
For resources and skill based industry, if the demand is not in the area, then the outside demand has to be estimated viz. other parts of the country of export markets.
1. Determine the size of the market to be investigated
2. How the present demand is being met
b. Other manufactures
3. At what price ?
4. From what distance ?
5. Possibility of import restriction
6. Enquire with :
a) Wholesalers )
b) Retailers ) at different places in the area.
c) Selected consumers )
7. Projection of demand based on :
a) Increase in the rates of consumption based on increasing standards of living.
i. Consult development plants, if available
b) Increase in population
c) Anticipated changes in the pattern of consumption.
8. Determination of demand of the product (s) if based on input of other sectors.
1. Other departments for information :
a. Present demand
b. Future demand
i. Based on increased productivity
ii. Development plans
2. For industrial products and components; enquire with consuming industry :
a. Their present source of supply; and
b. Expansion plans
3. For resources-based industries, contact:
a) Trade channels for the resources
i) Collection and distribution
ii) Ruling price
b) Possible increase in the resource production
c) Present outlet for the resource and cost
4. Share of Markets
d) What is the proposed share of the unit in the demand or the resource? Likely changes in the price structure as a result of the new unit.
e) If the share is high :
What are the reasons – quality, price or specially?
What are the proposed channels and strategy or marketing?
Careful selection of location is important for the success of a project. This involves analysis of :
a. Different towns in the same region; and
b. Different sites in the town chosen
Some considerations for the selection of location
Availability of infrastructure for industry such as:
a. Industrial Area or Estate;
b. Power, water & drainage
c. Transportation system;
d. Financial Institutions, such as banks;
e. Cost of land and construction;
f. Nearness to market and/or resources (e.g. Raw material)
g. Type of extent of industrial activity in the town; and
h. Social overheads in the town;
i. Availability of skilled/semi-skilled labour required by the unit.
(2) LAND & BUILDING
a. Purchase, rent or lease in Industrial Estate/Industrial Area, or outside
b. Present need Vs. Future expansion;
Building could be for immediate need with possibilities of additions while land has to be got keeping in view the future expansion
c. For calculation of the present need, consider; Layout, flow of material,
godown and office space and facilities consistent with local laws.
(3) PRODUCTION PROCESS AND SIZE OF PLANT
Alternate process and size of plants to be considered
(4) RATIONALE FOR SELECTION
a) Size of market and share of the unit in the anticipated market;
b) Suitability of raw material available;
c) Experience available for operation;
d) Cost of equipment; and
e) Availability of equipment and speedy implementation of projects.
i. Product or byproduct of other industries in the country
ii. Imported material
iii. Mineral, agricultural or forest or marine resources
g) Quality of the resources
h) Continuity of supply over a period, considering;
i. Programmes of large industries;
ii. Import liberalization or restrictions; and
iii. Price variations
i) Stocks to be maintained, and problems, if any.
(6) OTHER FACILITIES
j) Fuel, (b) Services, (c) Water, (d) Subcontracting, (e) Electricity, and (f) Transportation.
Are these available at reasonable prices?
(7) PERSONNEL REQUIREMENTS
a. Personnel required to be estimated taking into consideration the process and the layout of the plant specifying the number of skilled, unskilled and supervisory staff,
b. Managerial staff – requirement and the organisational relationship to be indicated.
c. Specification of qualification, experience, availability and salaries and wages prevailing in the area.
(1) Capital requirement
Capital requirements of the project can divided into two parts:
(a) Fixed capital
Capital that is required for acquiring fixed assets is known as fixed capital. Items which fall under this head are:
Land and Building
Machinery and equipment
Installation and electrification
(b) Working Capital
For acquiring consumables such as raw materials – packing materials, fuel, electricity, water, salaries and wages.
The amount of working capital required will depend on the time taken for completing the cycle between the acquisition of consumables to the selling of finished products.
(2) Total Cost
Total cost of Manufacture is made up Two Parts
a) Fixed cost
b) Variable cost
(a) FIXED COST
Items of cost which do not vary with the volume of production at a particular capacity of the plant.
These are –
Depreciation on building, machinery, installations and transport vehicles, etc.
Interest on total capital employed;
Salaries of permanent employees etc.
For calculation of fixed Cost, we may take half the value of Fixed Assets for the purposes of interest while calculating over the life of the plant. The value of fixed assets reduces, as we take out depreciation every year..
(b) VARIABLE COST
Items of cost that vary directly with the volume of production:
Cost of material;
3. SALES REVENUE
Total anticipated receipts at an envisaged price.
4. BREAK-EVEN POINT
In a manufacturing activity, at a particular level of production, the total costs of manufacturing will equal total sales revenue. This is a point of no profit no loss. Above this volume of production there is profit and below this level there is loss.
If the cost line and sales line are drawn on a graph with X axis as production and Y axis as value, then the intersection of these two lines gives the point where the sales revenue equals cost. This point is known as break-even point or point of no-profit-no-loss.
Break-even point can also be calculated mathematically as under:
BEP = F.C.
F.C. = Total Fixed Cost
S. = Unit Sales revenue
V = Unit variable cost
Margin of safety is the difference between the normal capacity and the break-even point production, where the market or the resource is new and uncertain it is safer to have a process having high margin of safety.
5. PROFITABILITY OF THE UNDERTAKING
Profit on total capital = Profit
Total capital employed
Profit on own capital = Profit___________
Own capital employed
Profit on sales = Profits (%)
These ratios will indicate profitability in relation to investment as well as sales
7. PRESENT VALUE ANALYSIS THROUGH DISCOUNTED
CASH FLOW TECHNIQUE
What are the income flows that arise from the investment ?
These are :
Amounts set apart against depreciation ;
Profits after taxes
If the future cash flows (that arise during the Life of the unit) are discounted as a particular rate of interest in the beginning itself, it is possible to know the present value of such cash flows.
If the discounted value of these cash flows is higher than the acquisition costs, the investment is profitable.
8. FINANCING OF THE PROJECT
a. Take into consideration various facilities available what would be the method of financing the project to maximize profit.
b. Debt servicing and repaying through profits. (Debt service coverage ratio indicates Debt bearing capacity.)
9. SPECIAL CONSIDERATIONS
Development measures being taken by agencies organizations and state such as
10. ADVERTAGES TO THE COMMUNITY
1. Need of the particular manufacturing activity in the area, (e.g. ice factory or cold storage.)
2. Need of the industrial activity for other sectors like housing or agriculture.
CAB H No. 1442
Source : SIET, Hyderabad
Modified by Shri S.Rajagopal, FM, CAB, Pune
Updated by Shri Shrimohan Yadav, FM, CAB, Pune - August 2007
SSI - Project Feasibility Studies , By: Shrimohan Yadav